The evolution of infrastructure investing
Infrastructure investing will look materially different over the next decade from the last. The opportunity set has expanded as digitalization, decarbonization and deglobalization reshape global economies. It now spans a broader range of sectors, return drivers, risk profiles, capital structures, liquidity characteristics and access points. Yet many existing allocations may not fully capture this breadth, or may lack exposure to some of the most significant structural growth trends. For many institutional investors, the question is no longer whether to allocate to the asset class, but how to construct an integrated infrastructure portfolio that meets specific investment objectives.
We look at five questions institutional investors should consider when building a modern portfolio – including how to fund it, how to select strategies based on their return drivers, how to ensure appropriate compensation for the risks, how to best meet capital deployment, liquidity and pacing needs, and how to measure performance. For example, when it comes to return drivers, infrastructure strategies share three primary ones: cash yield, earnings growth, and multiple expansion and development. Yet the mix of each varies, so investors can select among strategies based on which sources of return best align with their objectives. For those who want reliable income, infrastructure debt and core strategies may be more appropriate. For those who want growth, it may make sense to move up the risk/return spectrum towards value-add and opportunistic strategies.
We end the paper with three illustrative portfolios that put all of these considerations into practice, emphasizing income, diversification and growth respectively.
Disclosures
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